This is a great question that we often get asked and often consider when someone really needs cash but may not qualify to refinance their existing mortgage OR they do not want to pay the penalties associated with paying out an existing mortgage. There is no perfect answer or a “one size fits all” solution, however here are some things to consider if you are evaluating a second mortgage.
Second mortgages usually consist of two (2) components that you need to consider: the interest rate and the fee charged. The interest rate and the fee charged usually trade off against each other to get the bank or lender the maximum return. For example, you may receive a quote of 7.99% per year as the interest rate and the fee may be 4.0% of the amount you are borrowing for a total quoted cost of 11.99% (7.99% plus 4.0%). In another case you may be quoted 9.99% for the interest rate and a fee of 2.0% for a total quoted cost of 11.99% (9.99% plus 2.0%). So why the difference? Because interest is paid over time and fees are paid up front a bank or lender may have a greater need to generate cash immediately so they will charge a higher fee and a lower interest rate. They may also think that because you will not have the mortgage for very long (meaning they cannot earn enough interest) they will offset the short time frame by charging a higher fee. Conversely if a bank or lender is in the business of providing longer term second mortgages they may choose to lower the fee and increase the interest rate because over time that may be a better return for them.
There are other items to consider when getting a second mortgage however the cost of the money should be where you start when looking to answer the question “should I get a second mortgage”? Recognizing that banks and lenders need to make a profit commensurate with the risk they believe they are taking, make sure you know how long you need the money and ALWAYS make sure you have figured out how you are going to repay it.
“A good decision is based on knowledge and not on numbers.” – Plato
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